Subprime Downgrade… more to come?

There was an interesting article in the WSJ on Moody’s downgrading 131 bonds backed by a pool of subprime mortgages.

Subprime Downgrade more to come

There was an interesting article in the WSJ on Moody’s downgrading 131 bonds backed by a pool of subprime mortgages. As dramatic as it sounds this downgrade only impacted $3 billion worth of bonds, less than 1% of the $400 billion in subprime mortgage issue in 2006.

Though these numbers don’t sound earth shattering, it is becoming painfully apparent that credit rating agencies are extremely reactive, not proactive. This downgrade took place because more data came to the surface (i.e. higher defaults in second mortgages that were lumped together with subprime loans in 2006).

Credit agencies are held to a higher standard than sell side analysts whose recommendations are as useful as last month’s newspaper. Credit agencies have legal access to non-public information and thus one would expect a better, proactive analysis. The problem is that the credit agency’s actions may have dire consequences on corresponding companies and turn into a self fulfilling prophecy (i.e. a downgrade to junk status may shut the company from credit markets and cause a bankruptcy).

Why does this matter? Well, if you think we are in the beginning stages of the subprime default cycle (I believe we are), than you’ll see more and more (reactive) downgrades from Moody’s and the likes. Be skeptical of credit agency ratings, use your own common sense.

Please read the following important disclosure here.

Related Articles

The Slippery Slope of Student Loan Forgiveness

The Slippery Slope of Student Loan Forgiveness – Edition 2024

My daughter Hannah was just accepted to University of Denver. She might take out student loans. Why wouldn’t she?
Hedging the Portfolio with Weapons of Mass Destruction

Hedging the Portfolio with Weapons of Mass Destruction

Uber's business is doing extremely well. It has reached escape velocity – the company's expenses have grown at a slow rate while its revenues are growing at 22% a year.
2024 IMA Annual Client Meetings

From Twinkies to Rolexes (IMA Client Dinner 2024 Video)

Once a year, we host what the IMA team gently calls “client appreciation week.” This week is very special to me, as I get to meet people who have entrusted their life savings to us. 

Cable Stocks Keep Getting Punched in the Mouth

Despite weakness in cable stock prices, our thesis on Charter Communications (CHTR) and Comcast (CMCSA) has not really changed. We made a small, superficial change in the portfolio.

Leave a Comment